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Climate change: beyond whether

As scientists tip 2007 to be the hottest year since records began, UBS Wealth Management Research publishes comprehensive research on what this means for investors.

The new report "UBS research focus" released by Wealth Management Research takes the latest research on climate change, offers a detailed, sector by sector, breakdown and identifies key investment opportunities and threats and translates it into concrete proposals for investment strategy. This creates a framework, guiding investors on how to handle the impact of unprecedented change, as the implications of climate change begin to make themselves felt.

Hot-house economics Although technological solutions to lower emissions are available, global policies to create incentives to reduce emissions are virtually nonexistent. However, the most important driver for mitigating climate change, and consequently the most important driver for the resulting investment risks and opportunities, is the future regulatory framework.

There are three reasons for this:

Increasing greenhouse gas concentrations are the result of market failures. Generally speaking, greenhouse gas emissions do not yet incur a cost.

Few cost-competitive alternatives to fossil fuels. Many renewable energies and energy-efficient technologies and services, which may contribute to climate change mitigation, are not yet cost-competitive when compared to energy from oil, natural gas, and coal.

High national strategic importance of energy.

It is the prospect of large-scale public interest in addressing the root causes of global warming, combined with more stringent regulation of greenhouse gas emissions, which makes the opportunities related to climate change mitigation a compelling investment case.

Winners and losers from climate change are not always obvious To limit the cost impact of regulations, industries that emit greenhouse gases can invest in low-carbon technology, trade emissions rights, invest in offset projects, and lobby to block or challenge regulation. Because of this, companies with low greenhouse gas exposure within a particular polluting industry are in a relatively strong position. In addition, companies manufacturing greenhouse-gas-intensive products may also be directly affected by greenhouse gas regulations.

Sectors whose operations depend on climate conditions have a high level of physical exposure, as do sectors whose operations would be interrupted by extreme weather events. Examples include agriculture, fisheries, forestry, water utilities, and water-intensive operations, but also tourism, healthcare, insurance, and operations sensitive to storms, such as offshore oil drilling.

Risks The risk of future climate change events on companies and industries includes heightened regulation, increased impairment of physical property, loss of revenues, erosion of reputation, individually or in combination.

Opportunities The more incentives that emerge to encourage people to limit greenhouse gas emissions, the greater the investment opportunities related to climate change mitigation. The opportunities related to climate change mitigation fall into two broad categories:

products and processes that deliver improved energy efficiency, and

development of renewable/low-carbon energy sources.

Those sectors, and the investment areas within them are best positioned to benefit from the changing climactic and regulatory environment.